Scary Words from Bernanke

If monetary policy is the best tool for dealing with deflation and treasuries aren't currently useful for implementing monetary policy, what is wrong with using other kinds of bonds to implement it?

I love the terminology - 'backstop' - they've gone from simple plumbing to managing waterways.

Or, better, after unclogging the pipes, they've now found that they need to turn on the tap. I expect that analogy in liberal use come January.

“Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again.” Ben Bernanke, 1999

David,

These words are only scary in that they clarify what we know to be true, namely that there is more than one reality. There is perception; of course, politicians who are dependent on voters for their jobs and Federal-Reserve chairmen who are dependent on politicians for theirs, depend heavily on perception, on “truth through advertising” so to speak. Then there are measurable results, based on data and statistics; these are less clear cut than we would like because the data and statistics that economists favor may be less meaningful to politicians. For example, compassion for employees of American companies in distress may be perceived more favorably than compassion for those who foot the bailout bills.

Several years ago, my 13-year-old son brought this home to me. Following a session of his politically-correct algebra class, where students were taught to solve problems as a group, he remarked to me that “solving for ‘x’ is not important; it’s how you feel about solving for ‘x’.” I’m sure you can draw the analogy.

The desire to "blue sky" solutions and think outside the box could actually be a good thing, as long as there is an understanding that continuous change and experimentation is the wrong solution. Too many people including George Bush, Barack Obama and almost all of congress have come to the mistaken conclusion that it is the government that solves problems. The truth is that government needs to create a framework that allows people to use their own resources to solve problems. This cannot happen if the framework keeps changing. The knowledge that Ben Bernanke is in the group that wants government to solve the problems is truly scary.

And yet output grew.

I do concur with Ben to a point...

Hoover (as documented in his speeches) was unable to conceive of leaving the Gold Standard, because of the number of contracts that had a gold convertibility clause in them. If the US devalued, debtors would be wiped out when they tried to pay back their ostensibly gold-denominated loans.

It took FDR a while to grasp this as well - eventually he came to the "blue sky" opinion that the Federal Government could indeed convert all contracts that call for gold into those that call for legal tender, and the "gold clause ban" legislation was passed, freeing FDR to devalue.

This was, of course, an unprecedented expansion of Federal power.

The way I read the Great Depression, the 1933 devaluation is the one thing that clearly helped. Everything else either clearly harmed or was questionable in helping out the situation.

(Look at my URL for info on the Gold Clause ban)

Here's my blue sky suggestion: free markets. We ought to try it some time, see how it works.

It should give you minor comfort to read the quote literally. FDR's New Deal actions were so ineffective in relieving the depression, thus setting the bar so low for comparison, that his willingness of aggressive experimentation was better and more important.

I easily found the Bernanke 99 paper through Google. Reading it gives clues to what to expect next from the Fed. It is not even a minor comfort.

Isn't the real issue that we have a massive world wide overcapacity and now a fall in the return on that investment.

We had a post cold war boom of 15+ years that allowed access to credit world wide. But that credit found industries, regions & investment allocation that doesn't have yield.

We overallocated resources to financial services as a % of GDP. Real Estate assets prices have grown to large relative to income or earnings to support them.

Savings,investment, productivity & income (if my econ is still correct) are the key drivers in long term growth, Purch Power, wealth.

If we look we had a low savings (you got better yield from debt) massive overinvestment in Real Estate, Financial Services, industrial overcapacity across 1000's of industries thru credit not strong balance sheets.

We all used credit instead of positive cash
(corp -working capital, free cash flow, low debt / consumers - savings ,low debt / Government - running deficits)

which we then leveraged as debt to compensate for low growth in income, productivity numbers were low except for 8 years in late 90's & early 2000's.

Total Investment (R & D, CapX, public, human capital) is low we have poor incentives, better yield in debt.

It all comes back to savings,investment, productivity & income.

All the fiscal policy or fed moves can't change the short term fundamentals that we built a credit/debt based investment economy vs. a working capital, free cash flow & savings